April 27, 2016: Boeing took new charges on the KC-46A tanker and 747-8 programs, but not on the 787, its first quarter financial results announced.
Boeing took a $162m pre-tax charge on the tanker at Boeing Commercial airplanes. A charge of $80m was taken on the Defense side of the business for the tanker. Another $70 pre-tax charge was taken on the 747-8 program.
Cash levels were lower than that at year end, due to the shareholder buyback, lower deliveries and the “timing” of cash flow, the company said. With marketable securities, Boeing ended the quarter with $8.4bn cash and equivalents vs $12.1bn at year end. Year-over-year, cash and securities were $8.4bn to $9.6bn.
Initial analyst reaction follows.
|Buckingham Research (Neutral)
BA Reported 1Q16 core or non-GAAP EPS of $1.74 including a $0.24 charge related to the KC-46 program and a $70M charge on the 747 program. BA’s results also included several ‘below the operating line’ benefits vs. our estimates. Excluding the charges and below the line items, adjusted core or non-GAAP EPS of $2.07 compares with our $1.94 (and we think our estimates were below consensus).
Cash flow of $1.2B in the quarter was better than our $827M expectations – and above BA’s guide.
Compared with our estimates, BA benefitted from a lower than expected tax rate, lower ‘Eliminations’, lower ‘Other’ Items, and lower ‘Other Income’.
BA bought back considerably more stock in the quarter than we estimated – 28.6M shares for $3.5B vs. our $2-$2.5B estimate. 1Q is generally the quarter with the largest amount of buybacks.
Total 1Q16 sales of $22.6B include a $213M benefit from Unallocated items, eliminations, and other. Adjusting for this item, sales of $22.4B were above our $21.7B expectations. was in-line with our expectations and slightly below $21.6B and consensus $21.5B
BCA sales of $14.4B were in-line with our estimate, but below $14.82B for consensus. BCA reported operating income was $1.033B – 7.2% operating margin. Adjusting for the charges, adjusted BCA margins were 8.8% were nearly in-line with our 8.9% and below 9.2% for consensus.
The 787 deferred production balance in 1Q16 was $28.6B slightly better than our expectations for $28.8B.
Q1 Core EPS was a solid beat ex-charges (747 and KC-46), 787 unit deferred production performed well (showing a 30% sequential improvement) and the buyback of $3.5B was extremely impressive. Boeing did not raise guidance, and we had not expected it to, but some in the investment community may be disappointed, especially those looking for an increase to BCA margin guidance, which may have been undermined by the above the charges. In sum, we think the market continues to struggle with the overall cycle, from both a macro (global economy, oil price, FX) perspective and from a micro (pricing, cash generation potential) perspective and thus we do not expect a significant reaction in the shares today.
Goldman Sachs (Sell)
Boeing reported mixed 1Q16 results. Total adjusted (for another tanker and another 747 charge) segment EBIT is ahead of consensus. The Defense segment drove that variance, with both revenue and margins ahead. But Commercial Aircraft, even when adding back the tanker and 747 charges, missed consensus on both revenue and margins. We imagine the market will be more concerned with the BCA variance than excited about the BDS variance (and in our estimation the BCA variance has larger negative forward implications than the BDS variance does positive). Cash flow in the quarter was better than our estimate, though Boeing points partially to timing and receipts and expenditures. The sequential 787 deferred production increase declined to $141mn from $201mn last quarter. All components of the 2016 outlook were reiterated.
Wells Fargo (Outperform)
EPS SUMMARY. Boeing’s Q1 Core EPS of $1.74 was below our $1.83/consensus $1.85 due to charges on the KC-46 Tanker ($0.24) and 747 ($0.10) programs. These accruals were offset partly by: (1) otherwise strong margin (+$0.11) and revenues (+$0.12) in Defense (DSS) on higher F-15 and C-17 deliveries; and (2) lower corporate expenses (+$0.12). Excluding the KC-46/747 charges, Commercial Airplanes (BCA) margin was still only 8.8% — below our 9.5% estimate (-$0.11 EPS).
CASH FLOW. Q1 FCF of $0.5B was ahead of our $0.1B estimate, helped by an increase in payables. In Q1 Boeing repurchased 28.6M shares for $3.5B ($122 average), well ahead of our $1.5B forecast.
ORDERS. As expected, Q1’s book/bill was only 0.71x, as BCA (0.42x) booked only 12 net widebody orders; DSS’s book/bill was a solid 1.25x (P-8A and Apache helicopter orders).
2016 GUIDANCE. Boeing affirmed 2016 guidance of ”Core” EPS of $8.15-$8.35 (consensus: $8.51); BCA unit deliveries (740-745); and implied free cash flow ($7.2B; consensus: $7.7B). While guidance now includes Q1’s KC-46/747 charges, it also benefits $0.12 from a lower share count (i.e., accelerated buybacks).
787 DEFERRED. Deferred costs for the 787 rose $141M to $28.65B – a sequential deceleration from Q4’s +$201M and slightly better than company guidance (up $200M). We estimate that on a per-unit basis the deferred cost was about $5M, down from Q4’s $7M.
CONCLUSION. In all, we would expect a flat-to modestly negative reaction given: (1) the core EPS miss; (2) disappointing BCA margin (even after excluding the ”one-time” charges); and (3) status quo cash flow guidance and 787 progress. Also, we would now expect a significant decline in share repurchase. We think bulls will point to flat EPS outlook despite charges implying better underlying earnings.